QFI as a New Mode of Foreign Investments Vs FII route Friday, August 17, 2012 Organized by Capital Market Committee Indian Merchants’ Chamber Mumbai

I.Regulatory Interfaces II.Eligibility III.KYC IV.Permitted Assets Classes V.Operational Procedures VI.Taxation VII.Repatriation VIII.Recommendations to make it a success Key aspects under discussion

Regulatory Interfaces SEBIRBICBDT Lead time to Commencement FIIPrior approvals No prior approvals. Custodian to file returns. Advance tax with annual returns About 3 months QFINo Approvals No prior approvals. Custodian to file returns. Withholding tax to be deducted by QDP. No obligation to file returns on QFI. About 2 weeks

Eligibility FIIQFI Eligible Investors AMC’s / Pension Funds / Endowments / Banks / Trusts / Etc Broad Based Funds Individuals Foreign Corporates Presently limited to any foreign entities from 45 countries. Disclosure of ultimate beneficiaries. Eligibility Criteria Foreign Corporates–Listed, $ 2B asset base & avg. net profits of $ 50M. Individuals must be foreign passport holders of 5 years with $ 50M net worth. Funds need to be regulated in their home jurisdiction. Declaration of being “Fit and Proper”!!! No questions asked. RBI ApprovalsFEMA ApprovalNot Required

List of 45 Eligible Countries Australia Austria Bahrain Belgium Brazil Bulgaria Canada China Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hong Kong Hungary Iceland Italy Japan Korea Lithuania Luxembourg Malta Mexico Netherlands New Zealand Norway Oman Poland Portugal Romania Russia Saudi Arabia Singapore Slovakia Slovenia South Africa Spain Sweden Switzerland UAE UK USA

Know your Client KYC documentation – Identical for FII’s & QFI’s No simpler than before, fortunately ONLY a ONE time nuisance Blessing to both Investor & Intermediaries – KYC Regulatory Agency (KRA)  KYC once uploaded by ONE Intermediary available to other Intermediaries  Each Intermediary ONLY executes their Client Agreement Banking KYC remains an EXCEPTION due to RBI excluded from scope of KRA Bottlenecks still to be addressed:  RBI and SEBI need to jointly take ownership for KRA to make it more investor friendly without impairing transparency  Today, uplinking client data on KRA takes nearly a month – too long, should not be more than 48 hours  Overseas Attestation remains a nuisance – Notary attestation costly & cumbersome, Indian Consulate very cumbersome too.  Attestation by Banks limited ONLY to banks with presence in India!  Since only FATF regime investors permitted, ought to allow regulated market intermediaries to attest for their Clients atleast.

Permitted Asset Classes Asset ClassFII’sQFI’s Equity5% per Sub Account and 10% per FII in Investee Company 5% per QFI subject to a maximum of 10% in aggregate per Investee Company Mutual FundsPermitted – both Debt & Growth G SecsPermittedNot Permitted Corporate BondsPermitted DerivativesPermittedNo derivatives as yet. Only forex hedging permitted.

Taxation Taxation of QFI’s is an area where clarity is still lacking Lack of clarity / uncertainties on following critical fronts: I.Is it obligatory on the part of QFI to file annual returns in India? II.QDP is required to deduct Withholding Taxes when securities are sold by QFI. What are those rates for withholding taxes? III.Treatment of losses incurred on some securities? IV.Is the QDP entitled to off set losses from profit trades? V.Are withholding taxes to be deducted on a daily basis from each trade and paid in to the government? VI.Does the QDP administer tax rates as per country specific DTAA agreement? VII.Does the CBDT issue a No Objection before funds may repatriated back to QFI?

Repatriation  No prior permission from any Regulator – CBDT or SEBI or RBI  QDP to take responsibility by deducting Withholding taxes as per Statute  QDP carries responsibility for future tax demands post closure of account or due to inadequate funds available in India  QDP makes remittance after satisfying for tax payments of QFI  QDP may retain some balances in the QFI account to offset future tax demands for a couple of years Fast Track Assessments needed to minimize future demand uncertainties

Operational Summary Account Set – Up QFI ONLY from FATF countries (presently 45) Disclosure of Ultimate Beneficiaries PAN Card QDP Custodian Multiple Brokers India Advisor (Optional) Single Bank account Single Demat account Limited POA with QDP Operations Pre-funding of trades Clearing & Settlement by QDP Custodians directly with Exchanges Permitted 1.Equity 2.Mutual Funds 3.Corporate debt Exclusions 1.Derivatives 2.G Secs Tax administered by QDP Grey Areas Tax administration to be further clarified by CBDT Obligation on QFI for filing of returns? Computation of withholding taxes – per trade Vs periodic aggregation of profits / losses? DTAA benefits?

Recommendations – Making a Success KYC attestation should be permitted ALSO by Banks not present in India KYC attestation should be permitted by Regulated Intermediaries from those FATF jurisdictions CBDT notifications to bring clarity about:  Obligation of QFI to file tax returns  Rates of Withholding taxes  Computation of profits – taxes per trade Vs periodic aggregation  DTAA administration by QDP?  Set – Off of losses by QDP? FAST TRACK Assessment of QFI’s to minimize uncertainty due to future tax demands Treatment & Eligibility of an entity registered in a FATF jurisdiction but more than 51% owned by Non – FATF residents? Shifting of Sub Accounts and NRI accounts under the QFI regime? Indian Merchants Chamber should make representations to Super Regulator to help expedite process